Venture Capital Investment Evaluation Based On ROV Approach

Venture capital investment includes four steps: screening, due diligence, evaluation and investment structuring, in the course of such investment, evaluation is quite important. This paper especially pays attention to the issue of venture capital investment evaluation approaches, it analyses the traditional evaluation approaches' limitations, and based on this, it introduces a new approach - Real Option Valuation, and tests its use effect.The key findings are: The traditional DCF approach does not consider the uncertainty in venture capital investment, and excludes value of flexibility, thus provides generally downwards biased valuations, while the ROV approach can manage the uncertainty and considers the value of flexibility, thus provides a more reasonable evaluation; The more uncertain the venture capital investment has, the more efficacy the ROV approach is; The ROV approach relies on inputs, which are estimated, therefore, the real option valuations even at best are just estimates; Sensitivity analysis on real option valuation can provide users great insight on the underlying mechanics of the value creation.The content of this paper is arranged as followings: Part one is introduction, the basis of the study is established by defining the research problems, research scope and research methods. Part two illustrates the whole process of venture capital investment, and discusses the quantitative analysis approaches used in the process of evaluation. ROV approach is discussed in Part three from a theoretic and a process point of view. In Part four, the ROV approach is used to evaluate venture capital investment, one is used to price the venture capital investment contract, and the other is used to evaluate the start-up. Part five summarizes the research by drawing the conclusions.